Integrating Relevant ESG Indicators in the Investment Process

Institutional investors have a fiduciary duty to consider environmental, social and governance (ESG) indicators that are relevant to financial performance (see Freshfields Bruckhaus Deringer, 2005, page 13).

European companies must disclose ESG indicators relevant to their business performance in management reports (see Articles 19 and 20 of EU Accounting Directive 2013/34/EU).

SD-M® GmbH, drawing on years of scientific research by its managing director Dr Axel Hesse, advises on how relevant ESG indicators can be integrated in the investment process using:

  • industry-specific key performance indicators (SD-KPI database for more than 4500 companies worldwide; iSTOXX SD-KPI-Indicesor a thematic approach (Big Six®).

Institutional investors expect that the integration of SD-KPIs contribute to outperformance in the long term. This was the consensus of leading European pension funds who were queried as part of a study (see page 18). In a separate study (see page 26), German institutional investors viewed the SD-KPI Standards as the best way of making sustainable investments mainstream.

SD-KPIs can be integrated into the investment process in a way that is easy to comprehend, standardised and systematic. The process enables the portfolio and the related mandates to remain largely intact – regardless of whether the registered trademark SD-KPInvest® is used for active investments or the SD-KPIndex® is used for passive investments.

This process is particularly appropriate for equity and bond investing and does not necessarily entail limiting the investment universe via exclusion. The process also enables the portfolio and the related mandates to remain largely intact, so that the cooperation between asset owners and asset managers may continue (see UN PRI Services and references).

  • a clear definition based on global standards that are
    simple, systematic and transparent.